PGW - PGG Wrightson

[Snoopy]

Snoopy - I don't have printed copies of PGW or NZS Accounts, but wouldn't the Performance Fee be calculated on ALL the NZS shares, i.e. not just those held by PGW?

Thanks Colin, I think you might be right. In that case the gross asset management fee is:

(0.015)($72.4m)= $1.09m (1) -as before.

And the share performance bonus fee would be:

0.2[$1.50-$1.10]x169.6m = $13.6m (2)

That gives a total performance fee of:

$13.6m+$1.09m=$14.8m, or $10.4m after tax. That is higher than the $8m that PGW are claiming. But it could be that the 'management fee' is accounted for somewhere else in the finance division and is not part of the 'performance fee', and it may be that tax is payable at the old company rate of 33%, not 30%. Make those adjustments and the performance fee payable is:

0.67 x $13.6m= $9.1m

That is getting closer. There may be some write offs carried forward from previous years, and Uruguayan taxes that cannot be offset that reduce the true figure to the $8m estimated. If that sounds like a windfall, don't forget that PGW also faced the cash call on the full payment of their partly paid NZS shares during the year, which amounted to $12.8m. Even taking into account all the fees scraped in by PGW, on a cashflow basis PGW are down for the year. Heavily down when you consider the performance fee will be taken as paid in new NZS shares.

As it happens, I think PGW are underestimating their bonus payment because NZS shares are doing much better than was predicted six months ago. If the volume weighted average price is closer to the $1.75 that I estimate, then the 'bonus fee' goes up like this:

0.2[$1.75-$1.10] x 170.9m= $22.2m

Plus there will also be a contribution from the December non-renouncable bonus issue, which was made at $1.50 (and hence wouldn't have qualified for the PGW bonus if the shares were only worth $1.50 over the valuation period.)

1/2 x0.2[$1.75-$1.65] x 73.33m= $1.5m

Add those up and you get a 'bonus payment' of $23.7m, or $15.9m after tax. That is $6.8m more than the $9.1m I calculated before on the same basis. So with any luck we PGW shareholders are in for an 'extra bonus' of $6.8m.

Adding that $6.8m to the $8m that PGW has forecast gives a total bonus of $14.8m. Based on NZS shares being worth $1.90 at the time the bonus is earned, that means PGW shareholders can expect an extra 7.8m NZS shares. That would raise the total number of NZS shares owned by PGW to something over 25m, only just shy of 15% of the company. That is nice for we PGW shareholders, but not so good for the existing holders of NZS.

SNOOPY

discl: hold PGW, NZS

[Snoopy]

For FY2007 PGC achieved a return of 15.8% (Net operating profit [equates to NPAT] of $26.5m) on its stated $168m investment in MARAC (PGC total net operating profit was $30.6m). The percentage contribution from PGW will no doubt be greater this year, but MARAC is weathering the current finance company storm in great style - latest half-year profit was up 11% over the previous comparable period, total receivables rose 14% during the six months, reinvestment rates remain within normal historical ranges, it has one of the rare (for the sector) Investment Grade credit ratings from Standard & Poors, has a $480m syndicated bank facility with NZ's five major banks, and a securitisation facility of around $300m. Apart from the ANZ-owned UDC and South Canterbury Finance, you won't find another NZ finance company as well-placed as MARAC.
Using your $1-95 attribution of per-share value, this places a market cap of (98m X $1-95) = $191m on MARAC, and a historical P/E ratio of 7.2 - not bad, even in today's conditions, given that they are still on a good profit growth path.

You make the case well for PGC Colin. But with today's announcement of a new $100m facility with the ASB for 'child' PGW to expand their own financing arm, perhaps we no longer need to own 'parent' PGC shares to have a solid foot in the finance camp? I say 'perhaps' because 'the finance arm' of PGW is a fairly broad church. It includes most of the associated income related to 'New Zealand Farming Systems Uruguay', as well as the income from lending to New Zealand farmers.

The PGW interim results included within operating earnings 'NZS management fees' and a performance fee of $11.9m which had an impact of $8m on net earnings. Take that away from the financial services segment net profit of $15.4m (p20 PGW interim report Dec 2007) and we find the New Zealand continuing farming related finance arm net profit was:

$15.4m-$8.0m = $7.4m

From the balance sheet on page 8 of the PGW interim report, the total 'finance receivables' are $335m (current) + $124m (non current), which makes a total of $459m. That means we can calculate PGW's New Zealand finance based annualised return on funds over the six months July 2007 to December 2007 to be:

$7.4m/[$459m x (1/2)]= 3.2%

3.2% isn't a bad lender's margin. If another $100m of loan funds (from the ASB) were available, then annualised NZ based finance profits for FY2009 could be as high as:

$7.4m x2 + $100m x 0.032= $18.0m

What is more with the demise of alternative sources of finance, this kind of income looks 'reliable' going forwards.

However, it is possible that this $100m extra funding is being targeted at the expansion of the NZ Farming System's Uruguay company instead. If PGW do indeed end up owning 15% of NZS (25m shares out of some 170m), and NZS carry out another round of capital raising then PGW may need that new line of credit. Still even a 1:1 offer at $2 would only consume half of the available money, if PGW took up all of their own rights.

The market certainly liked the news today with PGW share price surging to an all time high of $2.61. Still, I would have to consider some of that surge currency related, as the NZD drops into the US75c domain. Where to from here for PGW? I keep thinking the dream run must end. But if the currency depreciation trend gains any legs, can anyone say that a $3 share price by the end of the year is impossible? I don't think it is quite time to roll back those PGW shareholdings yet!

SNOOPY

discl: hold PGW, now my second largest NZX holding by a good margin, and second only to NZS.

[COLIN]

Snoopy:
I agree, entirely, that the PGW uptrend is unlikely to peter out for a while yet. A lot of positive news is coming through, i.e. the positive Uruguay story (against my earlier negative assessment, I must admit); wool being "sorted" (microns now, as well as crossbreds); expansion of the Wrightson Finance funding and business levels; the easing of the Kiwi dollar; the high values being realised by their rural property sales business (individual farm sales in the $20/30 million price range must produce considerable commissions income for PGW); apparently improving outlook for meat export sales prices; and the increasing global demand for agricultural produce. Now is definitely not the time to bail out of PGW, and I only wish I had taken a greater interest when they were around the $2 mark.
Interesting to see that the bid price for the AAD warrants (PGWIZB) is 175 this morning. My modest foray into those is returning a handsome yield.
Regarding the financing business: I could never understand why the old Wrightsons Company decided to get out of financing in the Alan Freeth/ Simon White era, when they sold out this part of their business to Rabobank. Seasonal financing is such a core part of Stock and Station Agency business. Re PGC versus PGW: I think you will find that Marac is able to fund itself at cheaper rates than Wrightson Finance. Wrightsons has debt issue quoted on the NZDX. Marac is coming out with a $100m 5-year bond issue which will probably be set at a yield close to the recently successful South Canterbury issue (they have the same S & P ratings). We will then be able to compare Marac with Wrightson Finance, on the secondary NZDX market.
I would like to have a greater direct investment in PGW but my holding in PGC gives me a bit more insurance by way of spreading risk.

[Snoopy]

Snoopy:
I agree, entirely, that the PGW uptrend is unlikely to peter out for a while yet. A lot of positive news is coming through, i.e. the positive Uruguay story (against my earlier negative assessment, I must admit); wool being "sorted" (microns now, as well as crossbreds); expansion of the Wrightson Finance funding and business levels; the easing of the Kiwi dollar; the high values being realised by their rural property sales business (individual farm sales in the $20/30 million price range must produce considerable commissions income for PGW); apparently improving outlook for meat export sales prices; and the increasing global demand for agricultural produce. Now is definitely not the time to bail out of PGW, and I only wish I had taken a greater interest when they were around the $2 mark.

$2? Macdunk would have sold you his for $1.60 only 18 months ago! And of course because Macdunk made a loss on that trade (despite profiting on his several PGW trades before that), he will never invest in PGW again - even though PGW has been one of the top two or three best perfrorming shares on the NZX since! My own average entry price to PGW is $1.33, and I have always added to my increasing holding when the share price is going down. Of course my average holding time is something like six years, so I haven't made quick money. And as an extra 'punishment' over those six years I have been forced to bank 47.5cps in dividends. Such are the 'trials' of the long term investor!

Interesting to see that the bid price for the AAD warrants (PGWIZB) is 175 this morning. My modest foray into those is returning a handsome yield.

Those warrants are 'in the money' already! PGW shares traded up to $2.75 late this morning!

Regarding the financing business: I could never understand why the old Wrightsons Company decided to get out of financing in the Alan Freeth/ Simon White era, when they sold out this part of their business to Rabobank. Seasonal financing is such a core part of Stock and Station Agency business.

I think of that as the Greg Kay era. Now there is a name from the past! I wonder whatever became of Greg? Perhaps after his, erm, 'defining era' holding the reins at dear old Wrightsons (as it was in those days) a career back under the radar in corporate law was the forced career path forwards?

'Lest we forgot', the 1998 balance sheet (after the finance arm sale) showed no term debt, and WRI declared a profit (excluding the sale of the finance division) of $6.6m. Take away from that the seven months of profit from PGW finance ($4.1m) and the net profit attributable to the remaining rump of the Wrightson business was $2.5m.

The previous balance sheet had shown over $86m in bank loans due to be repaid/renegotiated) over a tight two year time window. With a mere $2.5m in underlying profits how do you suppose WRI would have serviced this debt in the future? The answer of course is that they couldn't have. It took the sale of the highly profitable Wrightson finance arm to stave off probable bankruptcy for Wrightsons (although naturally enough it wasn't put in those terms to shareholders at the time).

SNOOPY

discl: A (very small) WRI shareholder since 1995, who has substantially increased my position in what is now PGW (particularly in the last four years).

[Snoopy]

Snoopy:
I agree, entirely, that the PGW uptrend is unlikely to peter out for a while yet. A lot of positive news is coming through, i.e. the positive Uruguay story (against my earlier negative assessment, I must admit); wool being "sorted" (microns now, as well as crossbreds); expansion of the Wrightson Finance funding and business levels; the easing of the Kiwi dollar; the high values being realised by their rural property sales business (individual farm sales in the $20/30 million price range must produce considerable commissions income for PGW); apparently improving outlook for meat export sales prices; and the increasing global demand for agricultural produce.

I picked up a copy of last weeks NBR. In there was a story about PGWs real estate arm having increased their turnover by 65% this year! This does not mean that real estate profits have increased by 65% of course. PGW have bought a small real estate company in Victoria and rebranded that as PGW. Furthermore there will have been costs in opening up new real estate branches within New Zealand. Rather frustratingly, the exact dollar value earned when declared will be submerged in the 'finance sector' sub result. Nevertheless it all builds on the wall of good news for PGW.

Did anyone else see the PGW announcement made to the stock exchange this morning? Rural Portfolio Investments (aka Baird McConnon and Craig Norgate with their cornerstone stake) increased their holding in PGW by 88,660 shares on Tuesday and Wednesday. Granted this is not significant compared to the 86,038,258 shares that RPI held before that. But it is always good to see the insiders buying - or is it? I though that insiders could only buy shares in a fairly narrow window around when company results were announced. The PGW annual result will be at least two months away. So how can RPI get away with this?

SNOOPY

[COLIN]

Snoopy: Thanks for your two contributions (above).
The other announcement today, about their 61% interest in the leading Stock and Station Agency in Uruguay, should also be a positive move, although the sp slipped back a bit.
The rural servicing sector can't be very big in Uruguay, though, if this company has an annual turnover of only US$30m. It depends what services they provide.
Craig Norgate has certainly put some fire-power into PGW. (I agree that, on the face of it, RPI's latest share purchases do seem "out of time" but I am sure there is a satisfactory explanation - is it something to do with a management contract, or other services to PGW, perhaps? Taking such payments in PGW shares, if provided in the contract, would not be "insider trading".)
You and I have a slightly different investing philosophy. I have been in and out of the old Wrightsons company two or three times over the years, and also PGG and PGW. (I regard myself as an "Active Investor" - certainly not a trader - and, if ever the IRD challenged me on that, my defence would be that I am constantly re-positioning my portfolio according to changing circumstances. )
One of my emerging basic investment principles, in recent years, is to "Buy into Strength, Sell into Weakness". It was many years before I could bring myself to sell shares at a loss to the original purchase price - and it is still hard to do this at times - but you have to rake over your portfolio regularly and ask yourself the question: "If I wasn't in this share today, would I still buy it today?" If the answer is "No" then why hang onto it? Easier said than done, though, and I do admit that I have bailed out of one or two prematurely.

However, as we all know, there is no one fool-proof method of investing, and we must all keep our minds open to other views.
I get the impression that you steer clear of energy stocks? Thats a pity, because there's plenty of fertile ground there (in Australia) for some excellent rewards. Try dipping your toe in the water there, sometime, you'll find the chase exhilarating. Coal Seam Gas is all the rage, but there is also plenty of hype and you need to do careful research, of course.
Anyway, lets enjoy our PGW involvement while it lasts.
Cheers!

[Snoopy]

The other announcement today, about their 61% interest in the leading Stock and Station Agency in Uruguay, should also be a positive move, although the sp slipped back a bit.
The rural servicing sector can't be very big in Uruguay, though, if this company has an annual turnover of only US$30m. It depends what services they provide.

I would actually be more worried if the PGW share price hadn't taken a dip Colin! When a share price rises as hard and fast as PGW has, I believe some corrections along the way are healthy.

The radio report I heard this morning said that PGW's Barry Brook was previously sharing an office building with the now 51 per cent owned Romualdo Rodriguez Limited (livestock, wool and rural real estate)! I get the impression that all of rural business in Urugauy is quite close knit. The corporate culture that PGW is breathing into Uruguay must be quite a shock to them.

According to PGW:
"Romualdo Rodriguez is highly regarded and has established a leadership position from 43 years of involvement in servicing the needs of farmers in Uruguay. Annual sales in the livestock business alone amount to around US$30 million."

That $US30m turnover they were talking about related to the livestock size of the business only Colin. Interestingly exactly ten years ago, from the WRI annual report, the Wrightson livestock business had $NZ34m in sales. Mergers and an increase in livestock value will have boosted that figure since. But the Romualdo Rodriguez business does seem to be of significant size. It is also good to see the Romualdo Rodriguez family holding onto a minority stake in the company, at least in the meantime.

You and I have a slightly different investing philosophy. I have been in and out of the old Wrightsons company two or three times over the years, and also PGG and PGW. (I regard myself as an "Active Investor" - certainly not a trader - and, if ever the IRD challenged me on that, my defence would be that I am constantly re-positioning my portfolio according to changing circumstances. )

Of course. Even I (partially - it was only a partial offer) sold out to Craig Norgate when RPI made their takeover foray into WRI. There were better dividend opportunities for income earning elsewhere, so I sold. Then when the WRI share price dropped back 'post takeover' the dividend yield improved so I once again boosted my WRI holding. All legitimate income investor activity. This is what income investors do.

I get the impression that you steer clear of energy stocks? Thats a pity, because there's plenty of fertile ground there (in Australia) for some excellent rewards. Try dipping your toe in the water there, sometime, you'll find the chase exhilarating. Coal Seam Gas is all the rage, but there is also plenty of hype and you need to do careful research, of course.

I have holdings in CEN and BHP (who own substantial petroleum assets) Colin. Actually I think BHP is my largest single global holding, so I wouldn't say I steer clear of energy stocks. But I don't consider myself an expert in energy. So I just sit on those holdings and let the existing company management do it for me. I read my first article on Coal Seam Gas in the popular media this week. When hot (pardon the pun) areas like this start to generate interest from the inexpert, this is normally a sign for me to get out rather than jump in! When the next energy price collapse comes, I might start picking over those energy coals again. IIRC I made good money on Transalta about ten years ago, when that looked like a dog.

SNOOPY

[COLIN]

Trading halt on PGC, PGW and SFF (the old PPCS).
Looks like some rationalisation on the meat industry front. Whatever it is, PGW will be sitting on top. Craig Norgate would not accept a subsidiary role.

[Snoopy]

Trading halt on PGC, PGW and SFF (the old PPCS).
Looks like some rationalisation on the meat industry front. Whatever it is, PGW will be sitting on top. Craig Norgate would not accept a subsidiary role.

A 50% interest in Silver Fern Farms! Getting in on the ground level of a fresh new meat co-operative sounds good. Just imagine if Norgate had instead tied himself to one of those tired old industry players like PPCS ;-P. Now that would not have looked so good!

'Managing meat from the pasture to the plate.' is a great slogan, but I fear 'achievement' will be harder than 'recitation'.

The meat industry in NZ has needed sorting out for a long time. Perhaps the entry of Norgate to the meat industry table will be the long awaited catalyst for actually getting things moving?

I see the deal will see $220m of PGW money go into acquiring 50% of the SFF co-operative, which will then become a 'half co-operative' 'half corporate' (Hmm, do I feel a feel a new Tui beer billboard coming on?). The $100m new banking facility PGW negotiated with ASB only three weeks ago won't go anywhere near covering this deal. Whether the deal goes ahead or not is still be be decided by July and August meetings from the existing co-operative's members. But given the failure of the meat industry to consolidate voluntarily, do the existing SFF holders have a real alternative? Also the PGW bankers will have to agree. PGW is relatively highly geared, given the volatility of its underlying earnings base. I think those bankers may agree more readily if shareholders stump up some more money as well. IMO we are looking at a cash issue for PGW in the next three months or so. Whether substantial shareholder PGC will need a cash issue as well is something I don't know.

SNOOPY

discl: hold PGW

[COLIN]

A 50% interest in Silver Fern Farms! Getting in on the ground level of a fresh new meat co-operative sounds good. Just imagine if Norgate had instead tied himself to one of those tired old industry players like PPCS ;-P. Now that would not have looked so good!

'Managing meat from the pasture to the plate.' is a great slogan, but I fear 'achievement' will be harder than 'recitation'.

The meat industry in NZ has needed sorting out for a long time. Perhaps the entry of Norgate to the meat industry table will be the long awaited catalyst for actually getting things moving?

I see the deal will see $220m of PGW money go into acquiring 50% of the SFF co-operative, which will then become a 'half co-operative' 'half corporate' (Hmm, do I feel a feel a new Tui beer billboard coming on?). The $100m new banking facility PGW negotiated with ASB only three weeks ago won't go anywhere near covering this deal. Whether the deal goes ahead or not is still be be decided by July and August meetings from the existing co-operative's members. But given the failure of the meat industry to consolidate voluntarily, do the existing SFF holders have a real alternative? Also the PGW bankers will have to agree. PGW is relatively highly geared, given the volatility of its underlying earnings base. I think those bankers may agree more readily if shareholders stump up some more money as well. IMO we are looking at a cash issue for PGW in the next three months or so. Whether substantial shareholder PGC will need a cash issue as well is something I don't know.

SNOOPY

discl: hold PGW

Agree, a cash issue by PGW seems inevitable. RPI (Norgate/McConnon investment vehicle) may also need to raise extra cash to fund their share, if they are to retain their existing proportion of PGW equity, but they may find it difficult to go to the public for this, given the current climate. (Not too sure about RPI's ability to roll over their existing public debt issues, but thats another matter. [Haven't checked the maturity dates of these]). PGC could probably fund from existing resources.
The structure of the new SFF Board may be a contentious issue, with a 50/50 split between PGW and the growers, with the inevitable "cleavage" issues. Farmers can be a most obstinate, obdurate, lot, as witness the struggles with trying to bring the big meat processors together, and the Fonterra battles with getting farmer approval to new capital structures. It would seem to hinge on who is to be the Chairman and whether he or she is to have a casting vote. There will doubtless be a Shareholders Agreement drawn up to cover this, but as things stand I can see long drawn out battles on getting the terms of that Agreement settled. But eventually, one way or another, the farmer-producers will come to see the sense of amalgamation, if a clear-cut case for the benefits (which undoubtedly exist) can be made to them, and will reluctantly accept that they may have to agree to something short of their most desirable outcome. And, as I expected, the market already sees the benefits for SFF by dropping the yields on the SFF debt issues on the NZDX.
Overall, I see this as a long-term positive development for PGW - and hence PGC.
"Food and Fuel" are the investment sectors to be in, these days, with little doubt.

DISC: Hold PGC, PGW, PGWIZB, SFF030